Cyclo Therapeutics, Inc. - Quarter Report: 2021 September (Form 10-Q)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Consolidated Financial Statements.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements.

CYCLO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

CYCLO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The information presented herein as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 is unaudited.

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of the more significant accounting policies of Cyclo Therapeutics, Inc. (the “Company,” “we,” “our” or “us”) that affect the accompanying consolidated financial statements:

(a) ORGANIZATION AND OPERATIONS––The Company was incorporated in August 1990 as a Florida corporation, under the name Cyclodextrin Technologies Development, Inc. with operations beginning in July 1992. In conjunction with a restructuring in 2000, we changed our name to CTD Holdings, Inc. We changed our name to Cyclo Therapeutics, Inc. in September 2019 to better reflect our current business, and on November 6, 2020, we reincorporated from the State of Florida to the State of Nevada.

We are a clinical stage biotechnology company that develops cyclodextrin-based products for the treatment of disease. We filed a Type II Drug Master File with the U.S. Food and Drug Administration (“FDA”) in 2014 for our lead drug candidate, Trappsol® Cyclo™ as a treatment for Niemann-Pick Type C disease (“NPC”). NPC is a rare and fatal cholesterol metabolism disease that impacts the brain, lungs, liver, spleen, and other organs. In 2015, we launched an International Clinical Program for Trappsol® Cyclo™ as a treatment for NPC. In 2016, we filed an Investigational New Drug application (“IND”) with the FDA, which described our Phase I clinical plans for a randomized, double blind, parallel group study at a single clinical site in the U.S. The Phase I study evaluated the safety of Trappsol® Cyclo™ along with markers of cholesterol metabolism and markers of NPC during a 14-week treatment period of intravenous administration of Trappsol® Cyclo™ every two weeks to participants 18 years of age and older. The IND was approved by the FDA in September 2016, and in January 2017 the FDA granted Fast Track designation to Trappsol® Cyclo™ for the treatment of NPC. Initial patient enrollment in the U.S. Phase I study commenced in September 2017. Enrollment in this study was completed in October 2019, and in May 2020 we announced Top Line data showing a favorable safety and tolerability profile for Trappsol® Cyclo™ in this study. In October 2020 we received a “Study May Proceed” notification from the FDA with respect to the proposed Phase III clinical trial. In June of 2021 we commenced enrollment in TransportNPC, a pivotal Phase III study of Trappsol® Cyclo™ for the treatment of NPC .

We have also filed Clinical Trial Applications for a Phase I/II clinical study with several European regulatory bodies, including those in the United Kingdom, Sweden and Italy, and in Israel, all of which have approved our applications. The Phase I/II study is evaluating the safety, tolerability and efficacy of Trappsol® Cyclo™ through a range of clinical outcomes, including neurologic, and respiratory, in addition to measurements of cholesterol metabolism and markers of NPC. The first patient was dosed in this study in July 2017, and in February 2020, we announced completion of enrollment of 12 patients in this study. In March of 2021 we announced that 100% of patients who completed the trial improved or remined stable, and 89% met the efficacy outcome measure of improvement in at least two domains of the 17-domain NPC severity scale.

In January 2018, the FDA authorized a single patient IND expanded access program using Trappsol® Cyclo™ for the treatment of Alzheimer’s disease. We prepared a synopsis for an early stage protocol using Trappsol® Cyclo™ intravenously to treat Alzheimer’s disease that was presented to the FDA in January of 2021. We received feedback from the FDA on this synopsis in April 2021 and have incorporated the feedback into our development strategy for the filing of an IND for a Phase II program. We intend to submit this IND to the FDA in the second half of 2021.

We also continue to operate our legacy fine chemical business, consisting of the sale of cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. However, our core business has transitioned to a biotechnology company primarily focused on the development of cyclodextrin-based biopharmaceuticals for the treatment of disease from a business that had been primarily reselling basic cyclodextrin products.

(b) BASIS OF PRESENTATION––The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements of the Company included in this Quarterly Report on Form 10-Q, including these notes, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The consolidated financial statements, and these notes, have been prepared in accordance with Generally Accepted Accounting Principles (GAAP) and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

(c) CASH AND CASH EQUIVALENTS––Cash and cash equivalents consist of cash and any highly liquid investments with an original purchased maturity of three months or less.

(d) ACCOUNTS RECEIVABLE––Accounts receivable are unsecured and non-interest bearing and stated at the amount we expect to collect from outstanding balances. Customer account balances with invoices dated over 90 days old are considered past due. The Company does not accrue interest on past due accounts. Customer payments are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, applied to the oldest unpaid invoices.

The carrying amount of accounts receivable are reduced by an allowance for credit losses that reflects management’s best estimate of the amounts that will not be collected. The Company reviews each customer balance where all or a portion of the balance exceeds 90 days from the invoice date. Based on the Company’s assessment of the customer's current creditworthiness, the Company estimates the portion, if any, of the balance that will not be collected, and writes off receivables as a charge to the allowance for credit losses when, in management’s estimation, it is probable that the receivable is worthless. Based on management’s assessment of the credit history with customers having outstanding balances and current relationships with them, an allowance for doubtful accounts was not deemed necessary at September 30, 2021 and December 31, 2020.

(e) INVENTORY AND COST OF PRODUCTS SOLD––Inventory consists of our pharmaceutical drug Trappsol® Cyclo™, cyclodextrin products and chemical complexes purchased for resale recorded at the lower of cost (first-in, first-out) or net realizable value. The Company records a specific reserve for inventory items that are determined to be obsolete. The reserve for obsolete inventory was $52,922 at September 30, 2021 and December 31, 2020, respectively. The Company’s reserve for obsolete inventory is based on the Company’s best estimates of product sales and customer demands. It is reasonably possible that the estimates used by the Company to determine its provisions for inventory write-downs will be materially different from actual write-downs. These differences could result in materially higher than expected inventory provisions and related costs, which could have a materially adverse effect on the Company’s results of operations and financial condition in the near term. Cost of products sold includes the acquisition cost of the products sold and does not include any allocation of outbound freight charges, indirect overhead expenses, warehouse and distribution expenses, or depreciation and amortization expense.

(f) PREPAID CLINICAL EXPENSES––Prepaid clinical expenses consist of our pharmaceutical drug Trappsol® Cyclo™ expected to be used in our clinical trial program recorded at cost. Prepaid clinical expenses represent valid future economic benefits based on our contracts with our vendors, and will be realized in the ordinary course of business.

(g) MORTGAGE NOTE RECEIVABLE––The mortgage note receivable is stated at amortized value, which is the amount we expect to collect. 

(h) FURNITURE AND EQUIPMENT––Furniture and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using primarily the straight-line method over the estimated useful lives of the assets (generally three to five years for computers and vehicles and seven to ten years for machinery, equipment and office furniture). We periodically review our long-lived assets to determine if the carrying value of assets may not be recoverable. If an impairment is identified, we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. 

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

(i) REVENUE RECOGNITION––Revenues are recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under Accounting Standard Update (“ASU”) No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

Product revenues

In the U.S. we sell our products to the end user or wholesale distributors. In other countries, we sell our products primarily to wholesale distributors and other third-party distribution partners. These customers subsequently resell our products to health care providers and patients.

Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial.  We treat shipping and handling costs performed after a customer obtains control of the product as a fulfillment cost. We have identified one performance obligation in our contracts with customers which is the delivery of product to our customers.  The transaction price is recognized in full when we deliver the product to our customer, which is the point at which we have satisfied our performance obligation.

Reserves for Discounts and Allowances

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, health care providers or payors, including those associated with the implementation of pricing actions in certain of the international markets in which we operate. Our process for estimating reserves established for these variable consideration components do not differ materially from our historical practices.

Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, contractual adjustments and returns. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer). Our estimates of reserves established for variable consideration typically utilize the most likely method and reflect our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.

For additional information on our revenues, please read Note 2, Revenues, to these consolidated financial statements.

(j) SHIPPING AND HANDLING FEES––Shipping and handling fees, if billed to customers, are included in product sales. Shipping and handling costs associated with inbound and outbound freight are expensed as incurred and included in freight and shipping expense.

(k) ADVERTISING––Advertising costs are charged to operations when incurred. We incur minimal advertising expenses.

(l) RESEARCH AND DEVELOPMENT COSTS––Research and development costs are expensed as incurred.

(m) INCOME TAXES––Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In addition, tax benefits related to positions considered uncertain are recognized only when it is more likely than not the position

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

(n) NET LOSS PER COMMON SHARE––Basic and fully diluted net loss per common share is computed using a simple weighted average of common shares outstanding during the periods presented. Outstanding warrants to purchase 2,048,186 common shares were antidilutive for the three and nine months ended September 30,2021, and outstanding warrants to purchase 936,229 common shares were antidilutive for the three and nine months ended September 30, 2020. Additionally, 222,700 stock options outstanding and to be exercised were antidilutive for the three and nine months ended September 30, 2021. There were no stock options outstanding for the three and nine months ended September 30, 2020.

(o) STOCK BASED COMPENSATION––The Company periodically awards stock to employees, directors, and consultants. In the case of employees and consultants, an expense is recognized equal to the fair value of the stock determined using the closing trading price of the stock on the award date. With respect to directors, the Company accrues stock compensation expense on a quarterly basis based on the Company’s historical director compensation policies, and each quarter recognizes such expense based on the trading price of the common stock during such quarter. This expense is then trued up at the time the shares are issued to directors based on the trading price at the time of issuance.

(p) FAIR VALUE MEASUREMENTS AND DISCLOSURES––The Fair Value Measurements and Disclosures topic of the Accounting Standards Codification (“ASC”) requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. The Fair Value Measurements and Disclosures topic emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

We have no assets or liabilities that are required to have their fair value measured on a recurring basis at September 30, 2021 and December 31, 2020.  Long-lived assets are measured at fair value on a non-recurring basis and are subject to fair value adjustments when there is evidence of impairment.

For short-term classes of our financial instruments, which include cash, accounts receivable and accounts payable, and which are not reported at fair value, the carrying amounts approximate fair value due to their short-term nature.  The fair value of the mortgage note receivable is estimated based on the present value of the underlying cash flows discounted at current rates. At September 30, 2021 and December 31, 2020, the carrying value of the mortgage note receivable approximates fair value.

(q) USE OF ESTIMATES––The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including regarding contingencies, that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company’s most significant estimate relates to inventory obsolescence. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.

(r) WARRANTS

The Company accounts for its warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants considering the authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC815”). The assessment considers whether the warrants

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and satisfy additional conditions for equity classification. Warrants that are liability-classified are measured at fair value at each reporting date in accordance with the guidance in ASC 820, Fair Value Measurement (“ASC 820”), with any subsequent changes in fair value recognized in the statement of operations in the period of change. The fair value of liability classified warrants was not material at September 30, 2021 and December 31, 2020.

(s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS––Management does not believe any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.

(t) UNCERTAINTY––The recent outbreak of the COVID-19 coronavirus is impacting worldwide economic activity. COVID-19 poses the risk that we or our employees, CROs, suppliers, manufacturers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns that may be requested or mandated by governmental authorities.  While it is not possible at this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 could disrupt our clinical trials, supply chain and the manufacture or shipment of our cyclodextrin products, and other related activities, which could have a material adverse effect on our business, financial condition and results of operations. While we have not yet experienced any disruptions in our business or other negative consequences relating to COVID-19, the extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted.

(u) LIQUIDITY AND GOING CONCERN––For the nine months ended September 30, 2021 and the year ended December 31, 2020, the Company incurred net losses of approximately $11,494,000 and $8,942,000, respectively. The Company has an accumulated deficit of approximately $45,556,000 at September 30, 2021.  Our recent losses have predominantly resulted from research and development expenses for our Trappsol® Cyclo™ product and other general operating expenses, including personnel expenses and board advisory fees. We believe our expenses will continue to increase as we conduct clinical trials and continue to seek regulatory approval for the use of Trappsol® Cyclo™ in the treatment of NPC.

For the nine months ended September 30, 2021, our operations used approximately $12,394,000 in cash. This cash was provided primarily by cash on hand from a public offering and through the exercise of warrants. On September 30, 2021, the Company had a cash balance of approximately $8,441,000. We will need additional capital to maintain our operations, continue our research and development programs, conduct clinical trials, seek regulatory approvals and manufacture and market our products.

The Company has incurred losses from operations in each of the last six years.  We will need to raise additional capital through the sale of our securities from time to time for the foreseeable future to fund the development of our drug product candidates through clinical development, manufacturing and commercialization. Our ability to obtain such additional capital will likely be subject to various factors, including our overall business performance and market conditions. If we cannot raise the additional funds required for our anticipated operations, we may be required to reduce the scope of or eliminate our research and development programs, delay our clinical trials and the ability to seek regulatory approvals, downsize our general and administrative infrastructure, or seek alternative measures to avoid insolvency. If we raise additional funds through future offerings of shares of our Common Stock or other securities, such offerings would cause dilution of current stockholders’ percentage ownership in the Company, which could be substantial. Future offerings also could have a material and adverse effect on the price of our Common Stock.

Our consolidated financial statements for the three and nine months ended September 30, 2021 have been prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon the availability of equity financing as noted above. We will need to raise additional capital to support our ongoing operations and continue our clinical trials.  These factors raise substantial doubt about our ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2) REVENUES:

The Company operates in one business segment, which primarily focuses on the development and commercialization of innovative cyclodextrin-based products for the treatment of people with serious and life threatening rare diseases and medical conditions. However, substantially all of the Company’s revenues are derived from the sale of cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. Currently, a small portion of the Company’s revenues are also generated by sales of Trappsol® Cyclo™ to South America (Brazil) for the treatment of NPC patients.

The Company considers there to be revenue concentration risks for regions where net product revenues exceed 10% of consolidated net product revenues. The concentration of the Company’s net product revenues within the regions below may have a material adverse effect on the Company’s revenues and results of operations if sales in the respective regions experience difficulties.

Revenues by product are summarized as follows:

Substantially all of our sales of Trappsol® Cyclo™ for the three and nine months ended September 30, 2021 and 2020 were to a single customer who exports the drug to South America. Substantially all of our Aquaplex® sales for the three and nine months ended September 30, 2021 and 2020 were to three customers and one customer, respectively.

(3) MAJOR CUSTOMERS AND SUPPLIERS:

Our revenues are derived primarily from chemical supply and pharmaceutical companies located primarily in the United States. For the nine months ended September 30, 2021 four major customers accounted for 65% of total revenues. For the nine months ended September 30, 2020, three major customers accounted for 66% of total revenues.

Substantially all inventory purchases were from three vendors in 2021 and 2020. These vendors are located primarily outside the United States.

We have three sources for our Aquaplex® products. There are multiple sources for our Trappsol® products.

For the nine months ended September 30, 2021, the product mix of our revenues consisted of 2% cyclodextrin complexes and 98% basic natural and chemically modified cyclodextrins. For the three months ended September 30, 2021 the product mix of our revenues consisted entirely of basic natural and chemically modified cyclodextrins. For the nine months ended September 30, 2020 the product mix of our revenues consisted of 4% biopharmaceuticals and 96% basic natural and chemically modified cyclodextrins. For the three months ended September 30, 2020 the product mix of our revenues consisted entirely of basic natural and chemically modified cyclodextrins.

(4) MORTGAGE NOTE RECEIVABLE

On January 21, 2016, we sold our real property located in High Springs, Florida to an unrelated party. Pursuant to the terms of the sale, at the closing, the buyer paid $10,000 in cash, less selling costs and settlement charges, and delivered to us a promissory note in the principal amount of $265,000, and a mortgage in our favor securing the buyer’s obligations under the promissory note. The promissory note provides for monthly payments of $3,653, including principal and interest at 4.25%, over a seven-year period that commenced March 1, 2016, with the unpaid balance due in February 2023.

(5) NOTE PAYABLE:

On May 4, 2020, the Company’s wholly-owned subsidiary Cyclodextrin Technologies Development, Inc., borrowed $158,524 from BBVA USA under the Paycheck Protection Program which was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The loan matures on May 4, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on September 5, 2021. Under the Paycheck Protection Program, the loan may be partially or wholly forgiven if the loan is used to fund certain qualifying expenses as described in the CARES Act. The Company believes it has used all of the loan proceeds for qualifying expenses, and plans to apply for forgiveness of the loan in accordance with the terms of the CARES Act.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(6) EQUITY TRANSACTIONS:

On December 8, 2020, the Company effected a 1-for-100 reverse split of its authorized and issued and outstanding shares of common stock. All share references have been restated for this reverse split to the earliest period presented. As a result of the split, the authorized shares of the Company’s common stock decreased to 10,000,000 shares. Thereafter, on June 24, 2021, following the approval of the Company’s stockholders at its annual meeting, the Company’s Articles of Incorporation were amended to increase the number of authorized shares of common stock from 10,000,000 to 20,000,000.

The Company expensed $124,998 in employee and board member stock compensation for the three and nine months ended September 30, 2021. The Company expensed $5,320 and $19,380 in employee and board member stock compensation for the three and nine months ended September  30, 2020, respectively. These shares were valued using quoted market values. The Company accrues stock compensation expense over the period earned for employees and board members. Stock compensation expense for board members is included in “Board of Directors fees and costs” on our statement of operations, and stock compensation expense for officers and employees that are not board members is included in “Personnel” on our statement of operations. In 2020, the Company did not issue shares of common stock for compensation. The Company issued 53,938 shares to employees in January 2021 with a value of $271,308 at the time of issuance, with respect to which compensation expense in that amount had been accrued as of December 31, 2020.

On April 24, 2020, the Company completed a private placement of common stock to a group of accredited investors that included several directors of the Company and members of management. Investors in the private placement purchased a total of 200,000 shares of common stock at a price of $10 per share, resulting in gross proceeds to the Company of $2,000,000.

On August 27, 2020, the Company completed a private placement of its securities to a group of accredited investors that included several directors of the Company and members of management.  Investors in the private placement purchased a total of 283,111 units at a price of $10 per unit, resulting in gross proceeds to the Company of $2,831,115. Each unit consisted of one share of common stock and a seven-year warrant to purchase one share of common stock at an exercise price of $15 per share.

On December 11, 2020, the Company sold an aggregate of 2,500,000 units at a price to the public of $5.00 per unit (the “Public Offering”), each unit consisting of one share of common stock, and a warrant to purchase one share of common stock at an exercise price of $5.00 per share (the “Warrants”), pursuant to an Underwriting Agreement we entered into with Maxim Group LLC (“Maxim”). In addition, pursuant to the Underwriting Agreement, the Company granted Maxim a 45-day option to purchase up to 375,000 additional shares of common stock, and/or 375,000 additional Warrants, to cover over-allotments in connection with the Offering, which Maxim partially exercised to purchase 375,000 Warrants on the closing date.

The Company received gross proceeds of $12,503,750 upon the initial closing of the Public Offering, before deducting underwriting discounts and commissions of eight percent (8%), and expenses. On December 22, 2020, the Company sold an additional 375,000 shares of common stock to Maxim upon its exercise of the balance of its over-allotment option, and received additional gross proceeds of $1,871,250 from such sale, bringing the total gross proceeds of the Public Offering to $14,375,000. The total expenses of the Public Offering were approximately $1,703,000 which included Maxim’s expenses relating to the offering.

Pursuant to the Underwriting Agreement, we issued warrants (the “Underwriter’s Warrants”) to Maxim to purchase 57,500 shares of common stock (2% of the shares of common stock sold in the Public Offering). The Underwriter’s Warrants are exercisable at $6.25 per share of common stock and have a term of five years.

Subsequent to the closing of the Public Offering through December 31, 2020, Warrants to purchase an aggregate of 197,000 shares of common stock were exercised, resulting in gross proceeds to the Company of $985,000.

In January 2021, 10,000 shares of common stock with a value of $50,300 were issued to a nonemployee for services.

In February and March 2021 warrants issued in our December 2020 Public Offering were exercised to purchase an aggregate of 1,519,984 shares of common stock, resulting in gross proceeds to the Company of $7,599,920.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(6) EQUITY TRANSACTIONS: (CONTINUED)

In March 2021, warrants to purchase an aggregate of 9,436 shares of common stock were exercised on a cashless basis, resulting in the issuance of 2,913 shares of common stock.

In June 2021, warrants issued in our December 2020 Public Offering were exercised to purchase an aggregate of 78,220 shares of common stock, resulting in gross proceeds to the Company of $391,100.

In July 2021, warrants issued in our December 2020 Public Offering were exercised to purchase an aggregate of 1,000 shares of common stock, resulting in gross proceeds to the Company of $5,000.

In August 2021, the Company entered into an Equity Distribution Agreement under which it may from time to time sell shares of common stock, through the sales agent party to such agreement, having an aggregate offering price of up to $20,000,000. The Company is required to pay the sales agent commissions of 3% of the gross proceeds of any shares sold under the Equity Distribution Agreement. As of September 30, 2021, the Company had not sold any shares of common stock under the agreement.

As of September 30, 2021, the Company had warrants outstanding to purchase 2,048,186 shares of common stock at exercise prices of $5.00 - $65.00 per share that expire at various dates through 2027. In addition, there are seven-year warrants outstanding at September 30, 2021 to purchase 4,800 Units sold in our May 2016 private placement at an exercise price of $25.00 per Unit, 1,641 Units sold in our February 2017 private placement at an exercise price of $35.00 per Unit, and 2,400 Units sold in our October 2017 private placement at an exercise price of $25.00 per Unit. 

(7) INCOME TAXES:

The Company reported a net loss for the three and nine months ended September 30, 2021 and 2020, respectively. The Company increased its deferred tax asset valuation allowance rather than recognize an income tax benefit.

(8) EQUITY INCENTIVE PLAN:

On August 29, 2019, the Company’s stockholders approved the Company’s 2019 Omnibus Equity Incentive Plan at a special meeting of stockholders (the “2019 Plan”). The 2019 Plan provides for the issuance of up to 68,437 shares of common stock pursuant to the grant of shares of common stock, stock options or other awards, to employees, officers or directors of, and consultants to, the Company and its subsidiaries. Options granted under the 2019 Plan may either be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date of grant. As of September 30, 2021, we had awarded 68,437 shares of common stock as awards under the 2019 Plan, with no shares of common stock remaining available for future awards under the 2019 Plan.

On June 24, 2021, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan at its annual meeting of stockholders (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 3,000,000 shares of common stock pursuant to the grant of shares of common stock, stock options or other awards, to employees, officers or directors of, and consultants to, the Company and its subsidiaries. Options granted under the Incentive Plan may either be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date of grant. During the three months ended September 30, 2021, we granted options under the Incentive Plan to purchase 222,700 shares of common stock, with 2,777,300 shares of common stock remaining available for future awards.

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8) EQUITY INCENTIVE PLAN: (CONTINUED)

The Company uses the Black-Scholes valuation model to estimate the fair value of stock options at grant date. This valuation model uses the option exercise price as well as estimates and assumptions related to the expected price volatility of the Company’s stock, the rate of return on risk-free investments, the expected period during which the options will be outstanding, and the expected dividend yield for the Company’s common stock to estimate the fair value of a stock option at the date of grant. The valuation assumptions were determined as follows:

●        Expected stock price volatility: There is a limited market for the Company’s common stock providing a basis to estimate the expected volatility of the Company’s stock prices for the purpose of valuing stock options granted. Alternatively, the Company uses the historical volatility of certain publicly traded companies that represents the primary industry sector within which the Company operates.

●         Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

●         Expected term of options: The expected term of options represents the period of time options are expected to be outstanding.

●        Expected annual dividends: The estimate for annual dividends is $0 because the Company has not historically paid and does not intend to pay dividends in the foreseeable future.

Share-based compensation expense is recorded on a straight-line basis over the requisite service period, which is generally the vesting period.

The following table summarizes weighted-average assumptions used in our calculations of fair value for the three months ended  September 30, 2021 and 2020:

The fair value of options granted during the three months ended September 30, 2021, as determined under the Black-Scholes valuation model, was $5.28 – $5.64. We did not have any options outstanding prior to July 1, 2021.

The following is a summary of the stock option activity for the nine months ended September 30, 2021:

 ​

Unrecognized compensation expense related to unvested stock options was $1,009,610 as of September 30, 2021, which is expected to be recognized over a weighted-average period of 4 years and will be adjusted for terminations as they occur.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis provides information to explain our results of operations and financial condition.  You should also read our unaudited consolidated interim financial statements and their notes included in this Form 10-Q, and our audited consolidated financial statements and their notes and other information included in our Annual Report on Form 10-K for the year ended December 31, 2020.  This report may contain forward-looking statements. Forward-looking statements within this Form 10-Q are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will” “plans” and other similar expressions; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.  These forward-looking statements are subject to significant risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed in, or implied by, these forward-looking statements.  Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events, circumstances or developments occurring subsequent to the filing of this Form 10-Q with the U.S. Securities and Exchange Commission (the “SEC”) or for any other reason and you should not place undue reliance on these forward-looking statements.  You should carefully review and consider the various disclosures the Company makes in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business. All amounts presented herein are rounded to nearest $1,000.

Overview

We are a clinical stage biotechnology company that develops cyclodextrin-based products for the treatment of disease. We filed a Type II Drug Master File with the U.S. Food and Drug Administration (“FDA”) in 2014 for our lead drug candidate, Trappsol® Cyclo™ (hydroxypropyl beta cyclodextrin) as a treatment for Niemann-Pick Type C disease (“NPC”). NPC is a rare and fatal cholesterol metabolism disease that impacts the brain, lungs, liver, spleen, and other organs. In 2015, we launched an International Clinical Program for Trappsol® Cyclo™ as a treatment for NPC. In 2016, we filed an Investigational New Drug application (“IND”) with the FDA, which described our Phase I clinical plans for a randomized, double blind, parallel group study at a single clinical site in the U.S. The Phase I study evaluated the safety of Trappsol® Cyclo™ along with markers of cholesterol metabolism and markers of NPC during a 14-week treatment period of intravenous administration of Trappsol® Cyclo™ every two weeks to participants 18 years of age and older. The IND was approved by the FDA in September 2016, and in January 2017 the FDA granted Fast Track designation to Trappsol® Cyclo™ for the treatment of NPC. Initial patient enrollment in the U.S. Phase I study commenced in September 2017. Enrollment in this study was completed in October 2019, and in September 2020 we announced Top Line data showing a favorable safety and tolerability profile for Trappsol® Cyclo™ in this study.

We have also filed Clinical Trial Applications for a Phase I/II clinical study with several European regulatory bodies, including those in the United Kingdom, Sweden and Italy, and in Israel, all of which have approved our applications. The Phase I/II study is evaluating the safety, tolerability and efficacy of Trappsol® Cyclo™ through a range of clinical outcomes, including neurologic, and respiratory, in addition to measurements of cholesterol metabolism and markers of NPC. The European/Israel study is similar to the U.S. study, providing for the administration of Trappsol® Cyclo™ intravenously to NPC patients every two weeks in a double-blind, randomized trial but it differs in that the study period is for 48 weeks (24 doses). The first patient was dosed in this study in July 2017, and in February 2020, we announced completion of enrollment of 12 patients in this study. In March of 2021 we announced that 100% of patients who completed the trial improved or remained stable, and 89% met the efficacy outcome measure of improvement in at least two domains of the 17-domain NPC severity Scale.

Additionally, in February 2020 we had a face-to-face “Type C” meeting with the FDA with respect to the initiation of our pivotal Phase III clinical trial of Trappsol® Cyclo™ based on the clinical data obtained to date. At that meeting, we also discussed with the FDA submitting a New Drug Application (NDA) under Section 505(b)(1) of the Federal Food, Drug, and Cosmetic Act for the treatment of NPC in pediatric and adult patients with Trappsol® Cyclo™. A similar request was submitted to the European Medicines Agency (“EMA”) in February 2020, seeking scientific advice and protocol assistance from the EMA for proceeding with a Phase III clinical trial in Europe. In October 2020 we received a “Study May Proceed” notification from the FDA with respect to the proposed Phase III clinical trial.

In June of 2021 we commenced enrollment in TransportNPC, a pivotal Phase III study of Trappsol® Cyclo™ for the treatment of NPC . We currently estimate that in the event our pivotal Phase III trial proceeds as planned and provides further data supporting the safety and efficacy of Trappsol® Cyclo™ in the treatment of NPC, we may obtain regulatory approval of Trappsol® Cyclo™ as early as 2023.

Preliminary data from our clinical studies suggest that Trappsol® Cyclo™ releases cholesterol from cells, crosses the blood-brain-barrier in individuals suffering from NPC, and results in neurological and neurocognitive benefits and other clinical improvements in NPC patients. The full significance of these findings will be determined as part of the final analysis of these clinical trials.

On May 17, 2010, the FDA designated Trappsol® Cyclo™ as an orphan drug for the treatment of NPC, which would provide us with the exclusive right to sell Trappsol® Cyclo™ for the treatment of NPC for seven years following FDA drug approval. In April 2015, we also obtained Orphan Drug Designation for Trappsol® Cyclo™ in Europe, which will provide us with 10 years of market exclusivity following regulatory approval, which period will be extended to 12 years upon acceptance by the EMA’s Pediatric Committee of our pediatric investigation plan (PIP) demonstrating that Trappsol® Cyclo™ addresses the pediatric population. On January 12, 2017, we received Fast Track Designation from the FDA, and on December 1, 2017, the FDA designated NPC a Rare Pediatric Disease.

We are also exploring the use of cyclodextrins in the treatment of Alzheimer’s disease. In January 2018, the FDA authorized a single patient IND expanded access program using Trappsol® Cyclo™ for the treatment of Alzheimer’s disease. After 18 months of treatment in this geriatric patient with late-onset disease, the disease was stabilized and the drug was well tolerated. The patient also exhibited signs of improvement with less volatility and shorter latency in word-finding. In October 2019, we entered into an agreement with Worldwide Clinical Trials, a Contract Research Organization, to conduct a clinical trial to evaluate the safety and efficacy of Trappsol® Cyclo™ for the treatment of Alzheimer’s disease. We prepared a synopsis for an early stage protocol using Trappsol® Cyclo™ intravenously to treat Alzheimer’s disease that was presented to the FDA in January of 2021. We received feedback from the FDA on this synopsis in April 2021 and have incorporated the feedback into our development strategy for the filing of an IND for a Phase II program. We intend to submit this IND to the FDA in the second half of 2021.

We filed an international patent application in October 2019 under the Patent Cooperation Treaty directed to the treatment of Alzheimer’s disease with cyclodextrins, and are pursuing national and regional stage applications based on this international application. The terms of any patents resulting from these national or regional stage applications would be expected to expire in 2039 if all the requisite maintenance fees are paid.

We also continue to operate our legacy fine chemical business, consisting of the sale of cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. However, our core business has transitioned to a biotechnology company primarily focused on the development of cyclodextrin-based biopharmaceuticals for the treatment of disease from a business that had been primarily reselling basic cyclodextrin products. 

Results of Operations – Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

We reported net losses of approximately $3,860,000 and $11,494,000 for the three and nine months ended September 30, 2021, compared to net losses of approximately $1,436,000 and $6,262,000 for the three and nine months ended September 30, 2020.

Total revenues for the three month period ended September 30, 2021 increased 82% to approximately $404,000 compared to approximately $222,000 for the same period in 2020. Total revenues for the nine month period ended September 30, 2021 increased 32% to approximately $1,001,000 compared to approximately $758,000 for the same period in 2020. Our change in the mix of our product sales for the three and nine months ended September 30, 2021 and 2020 is as follows:

Trappsol® Cyclo

Sales of Trappsol® Cyclo™ increased to approximately $90 for the three month period ended September 30, 2021 from $0 for the three month period ended September 30, 2020. Our sales of Trappsol® Cyclo™ decreased by 93% for the nine month period ended September 30, 2021, to approximately $2,000 from approximately $30,000 for the nine months ended September 30, 2020. Substantially all of our sales of Trappsol® Cyclo™ for the nine months ended September 30, 2021 and 2020 were to a particular customer who exports the drug to South America. Our annual 2020 sales to this customer were approximately $104,000 (100% of total 2020 sales of Trappsol® Cyclo™).  This product is designated as an orphan drug; the population of patients who use the product on a compassionate basis is small.  

Trappsol® HPB

Our sales of Trappsol® HPB increased by 209% for the three months ended September 30, 2021 to approximately $286,000 from approximately $92,000 for the three month period ended September 30, 2020. Our sales of Trappsol® HPB increased by 18% for the nine month period ended September 30, 2021, to approximately $543,000 from approximately $459,000 for the nine months ended September 30, 2020.

Trappsol® other products

Our sales of other Trappsol® products decreased by 10% for the three months ended September 30, 2021 to approximately $116,000 from approximately $128,000 for the three month period ended September 30, 2020. Our sales of other Trappsol® products increased by 63% for the nine month period ended September 30, 2021, to approximately $425,000 from approximately $261,000 for the nine months ended September 30, 2020.

Aquaplex®

Our sales of Aquaplex® increased to approximately $200 for the three month period ended September 30, 2021. There were no sales of Aquaplex® for the three month period ended September 30, 2020. Our sales of Aquaplex® for the nine month period ended September 30, 2021 were approximately $23,000 compared to approximately $1,000 for the nine months ended September 30, 2020.

The largest customers for our legacy fine chemical business continue to follow historical product ordering trends by placing periodic large orders that represent a significant share of our annual sales volume. During the nine months ended September 30, 2021, our four largest customers accounted for 65% of our sales; the largest accounted for 21% of sales. During the nine months ended September 30, 2020, our three largest customers accounted for 66% of our sales; the largest accounted for 31% of sales. Historically, our usual smaller sales of HPB occur more frequently throughout the year compared to our large sales that we receive periodically. The timing of when we receive and are able to complete these two kinds of sales has a significant effect on our quarterly revenues and operating results and makes period to period comparisons difficult.

Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) for the nine month period ended September 30, 2021 increased 71% to approximately $87,000 from approximately $51,000 for the same period in 2020. Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) for the three month period ended September 30, 2021 increased 92% to approximately $23,000 from approximately $12,000 for the same period in 2020. Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) as a percentage of sales was 9% for the nine months ended September 30, 2021 and 7% for the nine months ended September 30, 2020. Historically, the timing and product mix of sales to our large customers has had a significant effect on our sales, cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) and the related margin. We did not experience any significant increases in material costs during 2020, or the first nine months of 2021.

Our gross margins may not be comparable to those of other entities, since some entities include all the costs related to their distribution network in cost of goods sold. Our cost of goods sold includes only the cost of products sold and does not include any allocation of inbound or outbound freight charges, indirect overhead expenses, warehouse and distribution expenses, or depreciation expense. Our employees provide receiving, inspection, warehousing and shipping operations for us. The cost of our employees is included in personnel expense. Our other costs of warehousing and shipping functions are included in office and other expense.

As we buy inventory from foreign suppliers, the change in the value of the U.S. dollar in relation to the Euro, Yen and Yuan has an effect on our cost of inventory. Our main supplier of specialty cyclodextrins and complexes, Cyclodextrin Research & Development Laboratory, is located in Hungary and its prices are set in Euros. The cost of our bulk inventory often changes due to fluctuations in the U.S. dollar. The cost of shipping from outside the U.S. also has a significant effect on our inventory acquisition costs. When we experience short-term increases in currency fluctuation or supplier price increases, we are often not able to raise our prices sufficiently to maintain our historical margins.  Therefore, our margins on these sales may decline. 

Personnel expenses increased by 293%, to approximately $1,668,000 for the three months ended September 30, 2021 from $425,000 for the three months ended September 30, 2020. Personnel expenses increased by 109%, to approximately $2,770,000 for the nine months ended September 30, 2021 from approximately $1,328,000 for the nine months ended September 30, 2020. The increase in personnel expense is due to our Chief Financial Officer moving from part-time to full-time employment with us at the end of 2020; the accrual of bonuses as a result of target bonuses approved by our Board of Directors for our executive officers in August 2021; and increased non-cash compensation costs resulting from the award of stock options in the three months ended September 30, 2021, including in connection with the hiring of a Chief Medical Officer at the end of September 2021. We expect to maintain our level of employees and related costs in the near term.

Research and development expenses increased 69% to approximately $1,838,000 for the three months ended September 30, 2021, from approximately $1,087,000 for the three months ended September 30, 2020. Research and development expenses increased 59% to approximately $7,739,000 for the nine months ended September 30, 2021, from approximately $4,860,000 for the nine months ended September 30, 2020. Research and development expenses as a percentage of our total operating expenses decreased to 62% for the nine months ended September 30, 2021 from 69% for the nine months ended September 30, 2020. The increase in research and development expense is due to increased activity in our International Clinical Program and U.S. clinical trials. We expect future research and development costs to further increase as we commence our Phase III clinical trial of Trappsol® Cyclo™ and continue to seek regulatory approval for the use of Trappsol® Cyclo™ in the treatment of NPC and Alzheimer’s disease.

Professional fees increased 525% to approximately $450,000 for the three months ended September 30, 2021, compared to approximately $72,000 for the three months ended September 30, 2020.  Professional fees increased 141% to approximately $1,047,000 for the nine months ended September 30, 2021, compared to approximately $435,000 for the nine months ended September 30, 2020.  Professional fees increased due to increases in investor relations costs, and the hiring of consultants, including a global head of patient advocacy and preliminary brand research costs.

Office and other expenses increased 407% to approximately $244,000 for the three months ended September 30, 2021, compared to approximately $48,000 for the three months ended September 30, 2020. Office and other expenses increased 161% to approximately $800,000 for the nine months ended September 30, 2021, compared to approximately $306,000 for the nine months ended September 30, 2020 due primarily to an increase in investor relations costs and an increase in insurance costs.

We increased our valuation allowance to offset the increase in our deferred tax asset from our net operating loss and did not recognize an income benefit or provision for the nine months ended September 30, 2021 and 2020, respectively.

Liquidity and Capital Resources

Our cash decreased to approximately $8,441,000 as of September 30, 2021, compared to approximately $12,846,000 as of December 31, 2020. Our current assets less current liabilities were approximately $7,573,000 as of September 30, 2021, compared to approximately $10,378,000 at December 31, 2020. Cash used in operations was approximately $12,394,000 for the nine months ended September 30, 2021, compared to approximately $5,479,000 for the same period in 2020. The increase in cash used in operations is due primarily to our net loss and increasing expenses for our drug development and expansion strategy, which we intend to continue funding with the capital we raised in our December 2020 public offering and with cash received thereafter upon the exercise of warrants issued in that offering as described below. 

In April 2020, we completed a private placement in which we raised $2,000,000 from the sale of 200,000 shares of Common Stock, at a price $10.00 per share, and in August 2020, we completed a private placement in which we raised an additional approximately $2,831,000 from the sale of 283,111 units at a price of $10.00 per unit, each unit consisting of one share of Common Stock and a seven-year warrant to purchase one share of Common Stock at an exercise price of $15.00 per share.

We also borrowed approximately $158,000 under the Paycheck Protection Program in May 2020, and plan to use the loan proceeds for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. While we currently believe our use of the loan proceeds met or will meet the conditions for forgiveness of the loan, there can be no assurance in that regard.

On December 11, 2020 we sold an aggregate of 2,500,000 units at a price to the public of $5.00 per unit (the “Public Offering”), each unit consisting of one share of our Common Stock, and a warrant to purchase one share of Common Stock at an exercise price of $5.00 per share (the “Warrants”), pursuant to an Underwriting Agreement we entered into with Maxim Group LLC (“Maxim”). In addition, pursuant to the Underwriting Agreement, we granted Maxim a 45-day option to purchase up to 375,000 additional shares of Common Stock, and/or 375,000 additional Warrants, to cover over-allotments in connection with the Offering, which Maxim partially exercised to purchase 375,000 Warrants on the closing date.

We received gross proceeds of $12,503,750 upon the initial closing of the Public Offering, before deducting underwriting discounts and commissions of eight percent (8%), and expenses. On December 22, 2020, we sold an additional 375,000 shares of Common Stock to Maxim upon its exercise of the balance of its over-allotment option, and received additional gross proceeds of $1,871,250 from such sale, bringing the total gross proceeds of the Public Offering to $14,375,000. The total expenses of the Public Offering were approximately $1,703,000 which included Maxim’s expenses relating to the offering.

Pursuant to the Underwriting Agreement, we issued warrants (the “Underwriter’s Warrants”) to Maxim to purchase up to a total of 57,500 shares of Common Stock (2% of the shares of Common Stock sold in the Public Offering). The Underwriter’s Warrants are exercisable at $6.25 per share of Common Stock and have a term of five years.

Subsequent to the closing of our December 2020 Public Offering through September 30, 2021, Warrants to purchase an aggregate of 1,796,204 shares of Common Stock were exercised resulting in gross proceeds to the Company of approximately $8,981,000.

In August 2021, we entered into an Equity Distribution Agreement under which we may from time to time sell shares of Common Stock, through the sales agent party to such agreement, having an aggregate offering price of up to $20,000,000. We are required to pay the sales agent commissions of 3% of the gross proceeds of any shares sold under the Equity Distribution Agreement. As of September 30, 2021, we had not sold any shares of Common Stock under the agreement.

We have continued to realize losses from operations, and have incurred losses from operations in each of our last six fiscal years. We will need to raise additional capital through the sale of our securities from time to time for the foreseeable future to support our ongoing operations and continue our clinical trials. Our ability to obtain such additional capital will likely be subject to various factors, including our overall business performance and market conditions. There can be no guarantee that we will be successful in our ability to raise capital to fund future operational and development initiatives. Our need for additional capital raises substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Our consolidated financial statements for the three months ended September 30, 2021 and year ended December 31, 2020 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. However, our ability to continue as a going concern is dependent upon the availability of equity financing as noted above.

At December 31, 2020, we had approximately $25,168,000 in net state and federal operating loss carryforwards expiring from 2021 through 2037, including $17,000,000 that will not expire, that can be used to offset our current and future taxable net income and reduce our income tax liabilities. We have provided a 100% valuation allowance on our deferred tax asset based on our expected future expenses related to our clinical trials and other development initiatives. 

We had no off-balance sheet arrangements as of September 30, 2021.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There were no significant changes to our critical accounting policies during the quarter ended September 30, 2021. For information  about critical accounting policies, see the discussion of critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.  Controls and Procedures.

a.  Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our principal executive and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2021.

b. Changes in Internal Control.

We made no changes in our internal control over financial reporting (as defined in Rules 13a-15(f)) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls that occurred during our last fiscal quarter that has materially affected, or which is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION 

Item 1A. Risk Factors.

We have identified no additional risk factors other than those included in our Annual Report on Form 10-K for our year ended December 31, 2020 that we filed with the Securities and Exchange Commission on March 12, 2021.  Readers are urged to carefully review our risk factors because they may cause our results to differ from the "forward-looking" statements made in this report. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business, financial condition and results of operations.  We do not undertake to update any of the "forward-looking" statements or to announce the results of any revisions to these "forward-looking" statements except as required by law.

Item 6. Exhibits.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.